The Growing Threat of a Wealth Tax

And not just because of high tax rates and double taxation of savings. Allister says people are worried about outright confiscation resulting from possible wealth taxation.

It is clear that individuals, when at all possible, need to accumulate more financial assets. …Tragically, it won’t happen. A lack of trust in the system is one important explanation. People simply don’t believe the government – and politicians of all parties – when it comes to long-terms savings and pensions. They worry, with good reason, that the rules will keep changing; they are afraid that savers are an easy target and that they will eventually be hit by a wealth tax.

Are savers being paranoid? Is Allister being paranoid?

Well, even paranoid people have enemies, and this already has happened in countries such as Poland and Argentina. Moreover, it appears that plenty of politicians and bureaucrats elsewhere want this type of punitive levy.

Germany’s Bundesbank said on Monday that countries about to go bankrupt should draw on the private wealth of their citizens through a one-off capital levy before asking other states for help.

Since data from the IMF, OECD, and BIS show that almost every industrialized nation will face a fiscal crisis in the next decade or two, people with assets understandably are concerned that their necks will be on the chopping block when politicians are scavenging for more cash to prop up failed welfare states.

Though to be fair, the Bundesbank may simply be sending a signal that German taxpayers don’t want to pick up the tab for fiscal excess in nations such as France and Greece. And it also acknowledged such a tax would harm growth.

“(A capital levy) corresponds to the principle of national responsibility, according to which tax payers are responsible for their government’s obligations before solidarity of other states is required,” the Bundesbank said in its monthly report. …the Bundesbank said it would not support an implementation of a recurrent wealth tax, saying it would harm growth.

…governments should consider imposing one-off capital levies on the rich… In Germany, for example, two thirds of the national wealth belongs to the richest 10% of the adult population. …a one-time capital levy of 10% on personal net wealth exceeding 250,000 euros per taxpayer (€500,000 for couples) could raise revenue of just over 9% of GDP. …In the other Eurozone crisis countries, it would presumably be possible to generate considerable amounts of money in the same way.

The pro-tax crowd at the International Monetary Fund has a similarly favorable perspective, relying on absurdly unrealistic conditions to argue that a wealth tax wouldn’t hurt growth. Here’s some of what the IMF asserted in its Fiscal Monitor last October.

The sharp deterioration of the public finances in many countries has revived interest in a “capital levy”— a one-off tax on private wealth—as an exceptional measure to restore debt sustainability. The appeal is that such a tax, if it is implemented before avoidance is possible and there is a belief that it will never be repeated, does not distort behavior (and may be seen by some as fair).

The IMF even floats a trial balloon that governments could confiscate 10 percent of household assets.

The tax rates needed to bring down public debt to precrisis levels…are sizable: reducing debt ratios to end-2007 levels would require (for a sample of 15 euro area countries) a tax rate of about 10 percent on households with positive net wealth.

Many people condemned the IMF for seeming to endorse theft by government.

The IMF’s Deputy Director of Fiscal Affairs then backpedaled a bit the following month. He did regurgitate the implausible notion that a wealth tax won’t hurt the economy so long as it only happens once and it is a surprise.

To an economist, …it’s close to an ideal form of taxation, since there is nothing you can now do to reduce, avoid, or evade it—the holy grail of what economists call a non-distorting tax. …Such a levy would entail a one-off charge on capital assets, the precise base being a matter for choice, but generally larger than cash left on kitchen tables. Added to the efficiency advantage of such a tax, many see an equity appeal in that such a charge would naturally fall most heavily on those with the most assets.

But he then felt obliged to point out some real-world concerns.

…governments have rarely implemented capital levies, and they have almost never succeeded. And there are very good reasons for that. …to be non-distorting the tax must be both unanticipated and believed certain not to be repeated. These are both very hard things to achieve. Introducing and implementing any new tax takes time, and governments can rarely do it in entire secrecy (even leaving aside transparency issues). And that gives time for assets to be moved abroad, run down, or concealed. The risk of future levies can be even more damaging; they discourage the saving and investment that generate future capital assets.

Though these practical flaws and problems don’t cause much hesitation on the left.

Here’s what Joann Weiner recently wrote in the Washington Post about the work of Thomas Piketty, a French economist who apparently believes society will be better if higher taxes result in everyone being equally poor.

A much higher tax on upper income — say 80 percent — coupled with a significant tax on wealth — say 10 percent — would go a long way toward making America’s income distribution more equitable than it is now. …capital is the chief culprit… Piketty has another pretty radical, at least for the United States, way to shrink the share of wealth at the top — introduce a global tax on all capital. This means taxes on not just stocks and bonds, but also land, homes, machines, patents — you name it; if it’s wealth or if it generates what tax authorities call “unearned income,” then it should be taxed. One other thing. All countries have to adopt the tax to keep capital from fleeing to tax havens.

Writing in the New York Times back in January, Thomas Edsall also applauds proposals for a new wealth tax.

…worsening inequality is an inevitable outcome of free market capitalism. …The only way to halt this process…is to impose a global progressive tax on wealth – global in order to prevent (among other things) the transfer of assets to countries without such levies. A global tax, in this scheme, would restrict the concentration of wealth and limit the income flowing to capital.

Not surprisingly, there’s support in academia for confiscating other people’s money. One professors thinks the “impossible dream” of theft by government could become reality.

…this article proposes a yearly graduated tax on the net wealth of all individuals in excess of $100 million. The rate would be 5% on the excess up to $500 million and then 10% thereafter. …Such taxes are attacked as “class warfare” that runs counter to America’s libertarian and capitalist traditions. However…the time may once again be ripe for adopting a new tax to combat the growing wealth inequality in the nation. …wealth inequality harms the very social fabric of society. …The purpose of the proposed Equality Tax would not be to raise general revenue, although revenue would be raised. Instead it would be focused on establishing a societal value that for the health of society, no individual should accrue wealth beyond a certain point. Essentially, once an individual has $100 million of assets, …further wealth accumulation harms society while providing little economic benefit or incentive to the individual. …At a minimum such a tax would raise
at least $140 billion a year.

Let’s close by looking at the real economic consequences of wealth taxation. Jan Schnellenbach of the Walter Eucken Intitut in Germany analyzed this question.

Are there sound economic reasons for the net wealth tax, as an instrument to tax stocks of physical and financial capital, to be levied in addition to taxes on capital incomes?

Before even addressing that issue, the author points out that policy actually has been moving in the right direction, presumably because of tax competition.

There has been a wave of OECD countries abolishing their personal net wealth taxes recently. Examples are Spain (abolished in 2008), Sweden (2007) as well as Finland, Iceland and Luxembourg (all 2006). Nevertheless, the net wealth tax repeatedly surfaces again in the public debate.

So what about the economics of a wealth tax? Schnellenbach makes the critical point that even a small levy on assets translates into a very punitive rate on actual returns.

…every tax on domestic wealth needs to be paid out of the returns on wealth, every net wealth tax with a given rate is trivially equivalent to a capital income tax with a substantially higher rate. …even an – on aggregate – non-confiscatory wealth tax may at least temporarily actually have confiscatory effects on individuals in periods where they realize sufficiently low returns on their capital stock.

He then looks at the impact on incentives.

…a net wealth tax will have similar distortionary effects as a capital income tax. …Introducing a comprehensive net wealth tax would then, through the creation of new incentives for tax avoidance and evasion, also diminish the base of the income tax. Scenarios with even a negative overall revenue effect would be conceivable. There is thus good reason to cast doubt on the popular belief that a net wealth tax combines little distortions and large amounts of revenue. …A wealth tax aggravates the distortions and the incentives to evade that already exist due to a pre-existing capital income tax.

And he closes by emphasizing that this form of double taxation undermines property rights.

The intrusion into private property rights may be far more severe for a wealth tax compared to an income tax. …It takes hold of a stock of wealth that consists of saved incomes which have already been subject to an income tax in the past… Our discussion has shown that economically, the wealth tax walks on thin ice.

In other words, a wealth tax is a very bad idea. And that’s true whether it’s a permanent levy or a one-time cash grab by politicians.

Some may wonder whether a wealth tax is a real threat. The answer depends on the time frame. Could such a levy happen in the next year or two in the United States?

The answer is no.

But the wealth tax will probably be a real threat in the not-too-distant future. America’s long-run fiscal outlook is very grim because of a rising burden of government spending.

This necessarily means there will be a big fiscal policy battle. On one side, libertarians and small-government advocates will push for genuine entitlement reform. Advocates of big government, by contrast, will want new revenues to enable and facilitate the expansion of the public sector.

10 Responses

Let’s see what happens then. I say, no one truly believes in socialism, because he never applies it to himself. It’s always everyone else who should be subject to taxes, redistribution, regulations, etc.

It has already happened here in the USA!! Look at the Government proposal to confiscate the common shares on Fannie Mae & Freddy Mac. The government confiscated their cash flow and intends to liquidate them without compensation to shareholders claiming the bailout as an excuse. The bailout terms were ignored when they started raiding the coffers. Who in their right mind would invest in ANY future mortgage company that will have to be structured in the same way as FNMA?!

Also, look at the “Debt Clock” You will see unfunded government liabilities is TWICE the net worth of ALL American taxpayers…in other words, the government would only be able to pay off half of the unfunded debt if it confiscated ALL tax payer wealth (cash and land etc.)….but who would be able to buy them out? Only foreigners with the money and poor judgment investing in a country that confiscates capital.

I don’t have a overwhelming opposition to a wealth tax, as long as all forms of wealth are considered. For example, how about taxing the benefits received by government officials based on their fair maker value. So, for example, Obama and/or his wife would be taxed for fair market values of the vacations that they take, the use of the White House for political purposes, the use of various security personnel and equipment for presidential political fundraising trips, the elimination of any deductions for the president or his spouse while he is in office, and the fair market value of any galas at the White House or other official buildings. This would put the President on a par with the rest of us The chances of this happening . . . zero.It seems there are two classes of people in the U.S., the ruling class and the underclass (the rest of us)

Is there any evidence that the one-time tax the rich Jews were forced to pay the German people in the ‘30s has had any negative impact on Jewish business activity in Germany? Or even in Jews and non-Jews beyond Germany? I think that some lessons tend to have an intergenerational permanence. European peoples who got their assets confiscated, nationalized, or drafted to public service during wars etc. just act differently. More cautious, more reserved, more content with just mediocrity, less likely to stick their necks out.

Failed businesses in France who cannot compete worldwide — because the French population, living under flatter effort reward curves, has marginally lesser incentives to produce compared to other jurisdictions – provides long term intergenerational lessons to people who may have otherwise chosen more ambitious, and thus more productive for the people themselves, life paths: “Don’t bother stressing out and wasting your youth with ambition Jacques! Remember what happened to Gustave? He started a company, hired a bunch of people that were overall less motivated than their counterparts worldwide, fought in frustration for thirty years to make it work, wasted his youth, and in the end failed. Just take your government healthcare, government studies, government assistance, get a surfboard, and head for the Caribbean ”.

That being said, active suppression of interest rates, as now practiced in the supposed public interest of most industrialized democracies, is also in essence a wealth tax on many types of savings. The delayed compensation of savers is slowly harvested by the low interest rates so that businesses can engage in activities that would otherwise not be profitable and thus are likely not worthwhile. That will also become a long term intergenerational lesson for savers. The new three pillars of economics seem to be: Distortion, distortion, distortion. Everything will be sacrificed to the People’s Dream… of a gentler, better prosperity, under flatter effort-reward curves… Oh, the perpetual motion machine of hope… the irresistible path to decline…

Finally, … a 10% wealth tax will bring public debt back to 2007 levels, i.e. roll back the clock by only seven years, but will NOT be repeated? Who believes that?

class warfare… wealth confiscation… we have seen it all before… in Germany during the 1930’s… the demonizing of a class of people… the confiscation of their property… and ultimately… the “final solution”… the extermination of eight million souls who’s crime was being different… and being successful…

don’t think for a moment that evil has left us… it’s still here waiting in the shadows… but this time with a fresh face… a phony smile… and an updated narrative…

I have to wonder, at what point is it worth considering that peaceful coexistence with socialists is simply not possible, especially in a country whose Constitution virtually precludes a large, federated social democracy? Is amicable divorce possible or must it ultimately end….badly?